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It’s Official: Chinese FDI in the U.S. Is Soaring

This note analyzes the new headline figures and a second dataset, which shows that the benefits from Chinese investments for local economies are starting to become tangible.

The U.S. Bureau of Economic Analysis (BEA) recently released its 2010 figures on foreign direct investment in the United States. The new dataset corrects earlier estimates of Chinese FDI in the United States and shows a big spike in 2010. According to the new figures, China’s FDI stock in the U.S. grew from $1.2 billion in 2008 to $5.9 billion in 2010, an increase of almost 400% in just two years. A separate BEA dataset on the operations of U.S. affiliates of foreign companies shows that in 2009, Chinese firms owned assets worth $19 billion in the U.S., employed more than 4,000 people and contributed $120 million to U.S. exports. While these numbers likely still underestimate the extent of Chinese investment, they show that the story of a surge in Chinese direct investment in the U.S. is real, and that the benefits from these investments for local economies are starting to become tangible.

A big jump in Chinese FDI in the US

The BEA publishes two measures of foreign countries’ FDI stock in the United States. First, the inward FDI position on a historical cost basis by country of foreign parent, which assigns investments to the direct parent company; second, the inward FDI position on an ultimate beneficiary owner (UBO), which tracks investment back to the country of the ultimate parent company, correcting for flows through holding companies in offshore financial centers obscuring the direct flow patterns.


Until now, China’s official FDI position in the U.S. was marginal by both measures. The latest available data put China’s FDI stock in 2009 at $791 million on a direct position basis and $2.3 billion on a UBO basis; both series showed growth in Chinese FDI stock in recent years, but the increase was gradual and at odds with anecdotal evidence about surging Chinese investment interests in America and figures from alternative datasets such as RHG’s China Investment Monitor.

BEA’s 2010 data release corrected earlier estimates and shows a huge increase in China’s FDI position in the US. The 2009 direct FDI stock was corrected from $791 million to $1.2 billion. In 2010, the direct FDI stock hit $3.2 billion, a year-on-year increase of 170%. In UBO terms — which is a better metric as it tries to capture flows through offshore holding companies — the Chinese FDI stock increased from $1.2 billion in 2008 to $5.9 billion in 2010, an increase of 380% in just two years (see Figure 1).

Despite the recent surge, China’s role as direct investor in the U.S. economy is still marginal. In 2010, European countries accounted for more than two-thirds of the total FDI stock in the U.S. of $2.34 trillion (Figure 2). Asia ranked second with a 16% share, with Japan being the major investor with a stock of $263 billion. China’s FDI stock of $5.9 billion accounted for a mere 0.25% of total foreign investment in the United States. China’s position is marginal compared to major investors such as the U.K. or Canada. It is also still lower than the investment stock of other BRICS countries such as Brazil ($16 billion) or India ($7 billion).


Operations of Chinese firms’ U.S. affiliates

The BEA also publishes a separate dataset on the operation of foreign multinationals in the U.S. These figures come in with an even bigger time lag, with the latest release from August 2011 covering the operations of firms in 2009. They also do not adequately capture the operations of smaller firms due to a threshold that excludes small firms from the sample. Despite these weaknesses, the survey gives us a couple of useful data points on the operations of Chinese firms’ affiliates in the U.S. economy.

First, Chinese businesses already have significant assets in the US. By 2009, U.S. subsidiaries of Chinese firms had assets of almost $19 billion on their books. Given the continued expansion of Chinese firms in 2010 and H1-2011, this figure should have climbed up to $20-30 billion by now. The asset figure is higher than the FDI stock because it includes gross assets regardless of the source of financing, whereas FDI by definition only includes cross-border investment in equity, intra-company loans and non-repatriated earnings.

Second, Chinese firms are creating local jobs that pay high wages. The 2008 figure for jobs provided by Chinese firms was corrected from 2,400 to 3,700. During the crisis year 2009, Chinese firms continued to add staff, employing 4,300 people at year-end. We believe that this figure significantly underestimates the number of jobs created by Chinese investors. The combined local staff of the top Chinese firms in the U.S. (Lenovo, Wanxiang, Huawei and Haier) is already higher than this figure, and the BEA data misses jobs created by smaller firms. Given the continued expansion of Chinese firms after 2009, the real employment figure should already be north of 10,000 by now. Total wages paid by Chinese subsidiaries amounted to $121 million in 2009, implying an average wage of $65,000.

Third, Chinese firms are net importers of goods and their trade deficit widened from $167 in 2008 to $517 million in 2009. It is likely that we will see a further increase of firms’ net trade deficit in coming years, as many newly created U.S. subsidiaries are sales offices or wholesale operations, and many Chinese manufacturers establishing a presence in the U.S. are deeply integrated into value chains in Asia. In the short term, this is a positive development for the U.S. as imports through a fully established Chinese subsidiary create local jobs in sales and after-sales services whereas arms-length Chinese exports do not have the same effects. An assessment of how increasing levels of Chinese FDI will affect China-US trade patterns in the longer term is more complicated and will mostly depend on two questions: first, to what extent do local operations allow Chinese firms to expand their export markets for higher value-added goods, for example machinery or transportation equipment? Second, will U.S.-based Chinese manufacturers significantly expand their exports to China? The good news with regard to the second question is that exports by Chinese subsidiaries are indeed growing rapidly, with a 4-fold increase from $49 million in 2008 to $121 million in 2009.

Finally, there is a steady increase in Chinese firms’ spending on research and development (R&D) in the United States. In 2009, BEA registered R&D expenses of $21 million, up from $17 million in 2008. The number for R&D spending should be markedly higher in 2010/2011, as leading Chinese high-tech firms such as Lenovo, Huawei or Hisense have all recently expanded their R&D presence in the United States. Huawei alone now operates eight R&D centers across the country.

The Bottom Line

The new BEA data confirm that the story about surging Chinese FDI in the United States is real, and show that the economic benefits of these new investment flows are gradually becoming more visible in terms of job creation, R&D spending and other positive spillover effects on local economies.

The release of the BEA data also shows that official statistics on cross-border investment flows miss important trends because they significantly lag behind real world developments. For a real-time proxy of Chinese FDI into the U.S., please check RHG’s China Investment Monitor, where we provide detailed data on Chinese FDI spending in the U.S. up to H1-2011.